Four Methods for Investors to Make Money in Real Estate

The real estate industry has taken it on the chin over the past few years. Clearly, there was too much leverage and money bidding up the prices of properties such that valuations were unreasonable and unsustainable. But there is still an opportunity for real estate investors to profit even in a tough environment when the four means by which money is made are considered.

Cash Flow

The most important aspect to consider when investing in real estate is the cash flow of the property. Sadly, this was ignored during the real estate bubble, which led many investors to overpay for property. When the time comes for the bills to be paid, the investor wants the cash generated by the property to cover those bills. If not, the result is additional capital requirements, selling at a loss, or possibly bankruptcy.

Appreciation

An increase in the value of a piece of property known as appreciation can occur through monetary forces as in inflation, supply and demand imbalances, or through improvements to the property. Knowing how appreciation can occur can lead to big profits for the real estate investor who has a plan for capturing the appreciation of a piece of property.

Equity Increases

Another source of profit for the real estate investor is the increased equity that occurs as the mortgage on the property is paid by the tenant. This increased equity may be accessible through lines of credit or may not be accessible until the property is sold. The equity could be impacted by the amount or lack of appreciation of the property as well. Cash flow, appreciation and equity increases require thoughtful analysis when making the original purchase to be sure that the investor does not pay too much.

Depreciation

Finally, an investor may profit through depreciation, which allows for tax deductions of the wear-and-tear of the property against the income generated by the property. This means that less tax is paid while the property is owned by the investor. There are special laws that govern depreciation, so it is best to consult with an accountant or attorney knowledgeable in real estate matters.

The most profitable real estate investments over the long term will incorporate all four methods of profit and not rely solely on appreciation, cash flow or depreciation. When real estate prices are depressed, potentially profitable purchases can be made.